Update on Petroleum Free Zones

Introduction

The Petroleum Free Zone concept is inherent to Panama's historical condition as an international commercial, maritime and trade center due to its strategic geographical position. The free zone is mainly an area within which all transactions are tax free.

Panama has the potential to become a major oil and downstream products redistribution center for two main reasons: one is the existence of the Panama Canal creating a natural transshipment point, and the other is the fact of being the narrowest isthmus between the Atlantic and Pacific oceans to pipeline oil from South America to the Far East. Companies already doing business in 10 petroleum free zones include Exxon/Mobil, BP, Chevron/Texaco, Gencor and others.

Here are some highlights -

• The Panama Canal expansion was completed and opened on June 26, 2016.

• The expansion will allow the Canal to accommodate a higher percentage of the world's liquefied natural gas fleet, greatly shortening the distance U.S. LNG exports must travel and thereby making them more competitive in the Asian market.

• The liquefied natural gas (LNG) tanker Maria Energy completed the milestone transit traveling southbound from the Atlantic to the Pacific Ocean on July 29, 2018. "The steady increase in Neo-Panamax transits reflect our customers' confidence in the Expanded Canal, particularly with our fastest-growing segment," said Panama Canal Administrator, Jorge L. Quijano. "This reaffirms the value and impact our route has had across global maritime trade, including the fast-growing LNG segment."

• The Panama Canal announced in June that it will be lifting natural daylight restrictions for LNG transits on October 1, 2018, to offer added capacity to shippers. By lifting encounter restrictions, LNG vessels will also be able to navigate Gatun Lake at the same time, allowing two different LNG vessels to transit the Canal the same day in two different directions, offering more flexibility to the segment.

• Of the 4,000 vessels that have transited to date, roughly 52 percent have been from the container segment. Liquefied petroleum gas (LPG) vessels constitute another 27 percent, and LNG carriers, a relatively new segment to the Panama Canal, have been responsible for 10 percent of traffic. Dry and liquid bulk carriers, car carriers and cruise ships make up the remaining transits.

• The Trans-Panama Pipeline (TPP) or Trans-Isthmian Pipeline, which is situated near the Costa Rican border, is another oil transit route that reduces transportation times and costs between the Atlantic and Pacific basins. Tanker data suggests that roughly 200,000 b/d of crude oil.

Qualified investors can engage in the following activities: Lease or acquire property and construct port facilities, including docks for loading and unloading petroleum shipments; Build, install and operate refineries and pumping facilities, construct storage tanks, pipe lines and other equipment for processing petroleum or preventing fire or spillage; and Import, store or handle petroleum for export or marketing and distribution within Panama.

Investment Opportunities

LNG is the new product in Panama, partially because of the expansion of the Panama Canal in 2016.

The panorama today is –

1. ES in building a 350MW gas powered plant and a LNG tank farm
2. Vopak is operating Chevron´s terminal
3. Chinese company Shanghai Gorgeous is building an LNG terminal
4. Marsano LNG terminal is in the works.
5. And there are others in planning.

Permitted Activities

Within any Petroleum Free Zone, individuals or corporations, national or foreign, may perform multiple operations under a special tax regime, as follows:

• Introduce, storage, refine, transform, manufacture, mix, purify, bottle, market, transport, transfer, pump, sell for the domestic market, export, reexport, and, in general, manage and supply crude oil, semi processed or any of its by-products; Petroleum Free Zone Users Type B are only permitted to introduce, storage, dry, mix, export and reexport crude petroleum, semi processed or any of its by-products in or from a Petroleum Free Zone.
• Build, install and operate petroleum refineries and other transformation or processing means of crude oil or semi-processed, storage tanks, oil pipelines, gas pipelines and poly-pipelines, pumping installations and pipes, buildings for offices, warehouses, or workshops and any other installations; introduce machinery, equipment, spare parts, containers, bottles, vehicles, furniture, equipment for fire or spill prevention, construct buildings for offices, warehouses, workshops for the use of the beneficiaries of the contracts to operate in the Petroleum Free Zones in any of the activities mentioned in subsection (a) hereinbefore;
• Lease, acquire or in any other manner use lands, easements, right of way and other real estate located in the areas designated as Petroleum Free Zones;
• Establish water services, electrical power, gas, energy, heat, refrigeration or any other kind of services, upon previous coordination and approval with the respective public entities;
• Build ports, piers, dry docks, shipping and unloading places for ship and airplanes, railroad stations for loading and unloading on land or granting contracts for the construction and exploitation of such works; and
• In general, all kinds of operations or activities proper or incidental to the establishment and operation of the Petroleum Free Zones for the introduction, storage, pumping, transference, distribution, marketing and/or crude refining and petroleum by products.

Incentives

There are 10 petroleum free zones. Contractors in these zones are granted the following benefits:

• Total exemption from income taxes on profits derived from such activities, during the first five years of production or until the initial investment is recovered; whichever comes first. From then on, the contractor pays income tax of 25%.
• Total exemption from import duties on machinery, equipment, parts, and any other items, necessary for the execution of the activities under the contract.
• Special carry-over provisions for income tax purposes.
• Special depreciation schedules for machinery and equipment.
• There are ten free fuel zones nationwide.

For more information, please contact us.

Dr.  Juan Francisco Pardini

pardini@padela.com